Software stocks extended their steep decline on Thursday, deepening a sell-off that has gripped the sector throughout the year. Investors have increasingly pulled back from software names amid mounting concerns that rapid advances in artificial intelligence could disrupt existing business models and undermine long-term growth prospects.

The iShares Expanded Tech-Software Sector ETF (IGV) fell 5.4% in a single session, marking its sharpest daily drop since April of last year during a tariff-driven market slump. With the fund now down roughly 22% from its recent peak, the broader software industry has officially entered bear-market territory. The swift reversal highlights how quickly market sentiment has shifted away from what was once one of Wall Street’s most favored sectors.

So far this month, IGV has lost more than 13%, putting it on track for its worst monthly performance since October 2008, when the fund plunged 23% during the depths of the global financial crisis.

Notably, fears surrounding AI disruption outweighed otherwise solid corporate earnings. Shares of ServiceNow dropped 10% on Thursday despite the enterprise software company beating Wall Street expectations for fourth-quarter results and issuing guidance that surpassed forecasts. The market reaction underscored how high the bar has become for established software firms.

Morgan Stanley analysts summed up the mood in a note following ServiceNow’s earnings release, saying the results were “good, but not good enough.” They noted that in an environment marked by heightened skepticism toward incumbent application vendors, steady growth that merely meets expectations may no longer be sufficient to change the broader narrative.

Across the sector, pressure has intensified as investors reassess whether AI-driven competitors and automation tools could weaken demand for traditional software licenses and established workflows. Business models once valued for predictable subscription growth are now being scrutinized through a new lens, with investors weighing the possibility that AI could permanently compress long-term revenue opportunities.

Adding to the negative momentum, Microsoft shares slid 10% after the company reported a deceleration in cloud revenue growth for its fiscal second quarter. The drop put the stock on course for its largest one-day decline since March 2020. Microsoft also issued operating margin guidance for the fiscal third quarter that came in below expectations, further unsettling investors.

Market anxiety has been fueled by the sheer speed of AI innovation. Anthropic, for example, released Claude Opus 4.5 late last year, marking its third major model launch within a two-month span. According to the company, the model demonstrates strong capabilities in coding, operating computers, and supporting complex enterprise tasks. Its target users include professional software developers as well as knowledge workers such as financial analysts, consultants, and accountants.

The rapid pace of these developments has raised uncomfortable comparisons for established tech giants. Ben Reitzes, head of technology research at Melius Research, commented on CNBC that it was striking how quickly Anthropic was able to develop and deploy advanced capabilities. He suggested that investors are increasingly questioning why larger incumbents are not perceived as moving at the same speed, warning that patience on Wall Street may be wearing thin.

European software names were not spared. SAP shares fell 15.2% after the German company reported weaker-than-expected growth in its cloud contract backlog for the fourth quarter. Current cloud backlog increased 16% to 21.1 billion euros, or about $25.3 billion, falling well short of expectations for roughly 26% growth. Analysts at UBS described the result as a disappointment, adding to the broader sense of unease around the sector.

In response to growing concerns, ServiceNow CEO Bill McDermott sought to reassure investors during the company’s earnings call. He argued that fears of AI displacing software vendors altogether are misguided. According to McDermott, the true value of AI will emerge when massive volumes of AI-generated outputs move beyond pilot programs and become embedded directly into core business workflows where critical decisions are made.

He emphasized that ServiceNow aims to serve as a central gateway for this transition, acting as a semantic layer that integrates AI across enterprise operations. McDermott also pointed out that because AI systems are inherently probabilistic, companies will continue to rely on workflow software to ensure consistency, governance, and reliable business outcomes.

Despite such reassurances, the sharp sell-off reflects a market grappling with a fundamental question: whether the rise of AI represents a powerful new tailwind for software companies, or a disruptive force that could reshape the industry more deeply than many investors had previously anticipated.